AT&T-Time Warner Ruling: Which Stocks Stand to Gain, Lose From the Judge’s Decision

Randall Stephenson - November 20, 2017  -Getty -H 2018
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THR looks at what the opinion means for the likes of 21st Century Fox, Walt Disney, Comcast and beyond.

Bankers and investors in the media, entertainment, telecom and technology industries will turn eyes and ears on Washington, D.C. after the market close on Tuesday.

Around 4 p.m. ET, a federal judge is expected to unveil, and later publish in full, his opinion on the government’s lawsuit to block telecom giant AT&T’s $85.4 billion acquisition of Time Warner. And depending on the opinion, the ruling could lead to further mergers and takeovers in the sector -- or put dealmaking on ice.

The judge’s decision is also expected to affect the stocks of big-sector players involved in previously announced or possible new deals, and even beyond.

While AT&T's stock is widely expected to rise in the case of an approval and fall in case of a negative opinion, Sanford C. Bernstein analyst Todd Juenger in a Monday report handicapped the likely entertainment-industry stock gainers and decliners in case the judge allows or blocks the mega-deal.

His favorite stock pick is 21st Century Fox. “Our favorite risk/reward positioning ahead of the ruling, by far, is long Fox,” Juenger wrote. “If AT&T/Time Warner is allowed to proceed ('yes'), we believe Comcast will put forth an aggressive cash bid. If AT&T/TW is blocked ('no'), then Fox has the backstop of the already accepted Disney bid, and we expect Disney shares would rally due to the lower likelihood of a bidding war, which would increase the value of Disney's all-stock bid for Fox,” which when unveiled was worth $52.4 billion.

Juenger’s “distant” second-favorite stock play ahead of the court decision is to long Time Warner. After all, if the sale to AT&T is approved, shareholders stand to be paid $102 per share based on the current price of AT&T shares. If not, “the downside is what TW shares are worth on their stand-alone fundamentals, which we estimate at about $88,” the analyst argued. “However, we believe TW would still be for sale, so the market would likely price the stock with an acquisition premium.”

Other entertainment industry stocks could also be affected by the judge’s antitrust ruling. “For the media ‘free radicals’ (CBS, Viacom, Discovery, AMC Networks, Lionsgate), ‘yes’ probably would provide an overall bid for the sector (‘M&A is on!’),” argued Juenger. “But that only sustains if a bidder exists for the particular company/stock, which we think is only likely for CBS, and Lionsgate at the right price.”

Evercore ISI analyst Vijay Jayant also argued that a deal approval “would be positive for media names” but neutral for pay TV and telecom stocks, as “it would be an indication that vertical integration in the space is likely to be generally permissible.”

Guggenheim Securities analyst Michael Morris in a Tuesday report highlighted that media stocks have actually already seen “recent appreciation, likely attributable (at least in part) to an expectation of further industry consolidation.” 

But he went on to warn investors not to get too excited about further deals ahead, saying: “We remain skeptical that additional mergers in the traditional ad-supported, linear television industry will address the core business challenge: that new entrants are willing and able to entertain audiences at a lower cost and/or with a more consumer friendly experience (absence of commercial interruptions, stacked episodes, seamless delivery across devices) than incumbent providers.”

A team of Macquarie Capital analysts in a recent report dove deeper into the ruling’s fallout for Walt Disney and Comcast given the former’s all-stock deal to acquire was large parts of Fox and the latter’s recent comment that it was working on a “superior” cash offer.

“Disney stock may face near-term pressure on the prospect of bidding up for two large assets,” namely large parts of Fox and European pay TV giant Sky, in which Fox owns a 39 percent stake, the Macquarie analysts said. “However, we think investors would be happy to see Disney give up Sky to Comcast, and we think the strategic moves Disney is making are correct for the long term. Upside to Disney stock thus depends still on the outcome of these deals.”

Given Comcast’s recent bid for Sky, which trumped Fox’s offer for full ownership, the Macquarie analysts said Sky was “a good plan B for Comcast" if it can’t get the Fox assets. If the cable giant wins Sky, “the asset could be enough to satiate its appetite to ‘get bigger’ and expand internationally,” its report said. “However, the concerns would be on the sustainability of Sky’s linear TV business and how quickly Comcast/Sky could pivot their existing service into a digital one. Any resolution/clarity on the M&A front would be a positive for Comcast shares.”

Meanwhile, Juenger predicted that Disney shares would move in the opposite direction of the Tuesday court ruling. If the TW sale is approved, Disney’s stock should drop due to an “expected bidding war” for Fox with Comcast, he said. But it the deal is blocked, Disney’s stock could rally, “but not for long, as investors and analysts would now start building their pro forma Disney/Fox models in earnest and have to come to grips with the reality of billions of dollars of investment required to prepare and launch the direct-to-consumer entertainment service,” he suggested.

While he doesn't cover Comcast, he said that “our directional view is the shares will likely remain under pressure either way.” Approval for the AT&T-TW deal would lead investors to expect “an aggressive bid” for Fox, he said. In the alternative scenario, “shareholders will await a ‘plan B’ transformative move, or the very difficult task of returning to business-as-usual (with management having lost shareholders' trust).”